Falklands oil players on the cusp of something huge
Tom Bulford Jul 03, 2012
Stand by for action! The Falklands Islands could be making headlines again very shortly. And this time, it won’t be Cameron and Kirchner who are dominating the headlines.
On 11 May, Borders & Southern (BOR), one of the intrepid band of Falklands oil explorers, announced that it had spudded its Stebbing well. "The well duration", said Borders, "is estimated to be 49 days". 49 days from 11 May takes us to 29 June – so any day now we should be getting the result of this well. And the whole Falklands oil story should take another step forward.
If you have been a Penny Sleuth subscriber for a while, you will know that I keep a watchful eye over the Falklands, and take note of every rumble and roar. Just this year some of the Falklands' oil explorers have seen share prices take a significant jump.
The most notable success so far has been Rockhopper’s Sea Lion discovery of 1.3 billion barrels – however, later on I shall tell you about a discovery which could prove to be up to three times this find!
While Cristina Kirchner and David Cameron were squaring up at the recent G20 meeting, and Argentinian officials were brandishing our prime minister a ‘colonialist’ for dismissing Kirchner's call for talks on the sovereignty of the islands, the oil industry is carrying on pretty much regardless.
Tensions fraught between Cameron and Kirchner
Let me deal with the political situation first. In respect of her demands over the Falklands, Kirchner has shot herself squarely in the foot by the sudden decision to nationalise the Argentinian interests of the Spanish oil company Repsol.
Kirchner accused Repsol of a failure to invest in the country’s oil industry, but this seemed little more than a trumped up excuse for an act of piracy that made Kirchner no friends outside of her own country and her limited cabal of South American sympathisers. In her attempts to enlist international support for her claims to the Falklands, this act of high handedness can only backfire.
Cameron, meanwhile, is sticking to his line that the Falkland Islanders should be allowed to make up their own mind about their political future. There will be a referendum next year on the issue and the chances of the islanders committing their future to the Argentinian flag are very remote indeed.
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Rich opportunity for the leading Falklands oil players
The Repsol affair has upset Spain, and now Argentina has French and Italian interests to contend with. This follows last week’s news that Edison Spa, an Italian utility owned by France’s EDF has farmed into the licences of Falkland Oil & Gas (FOGL). Edison will receive a 25% interest in Falkland Oil’s northern licences and a 12.5% interest in the southern licences off the archipelago in return for paying drilling costs of $50m and a separate cash payment of $40m.
This gives FOGL some useful financial ammunition to further its exploration programme and it expects to spud its first well on the giant Loligo prospect in July. With estimated potential recoverable resources of 4.7 billion barrels of oil, this is one of the biggest prospects drilled anywhere in recent years, and a successful find would turn the Falklands into a major oil province overnight. To put it in context, this is more than ten times the size of Rockhopper’s (RKH) Sea Lion find in the north Falklands Basin, which has estimated recoverable resources of 350 million barrels.
Rockhopper, though, does have the advantage of a confirmed find, the only one to date in the region. According to an independent assessment by Gaffney Cline & Associates, development of the Sea Lion field has a 90% chance of going ahead. On this basis, and after applying a 10% discount rate, it has been valued at £2.2bn, which is a long way over Rockhopper’s current £733m stock market valuation.
This gap reflects lingering doubts that the oil will ever be lifted, and what Rockhopper needs is a partner to put up much of the considerable amount of money needed to develop the field. Rockhopper has opened a data room to prospective partners, and chairman Dr Pierre Jungels comments that "whilst the location of our acreage has prevented some companies from being able to participate, I have been very pleased by the quality of those that are doing so". Participation in the Rockhopper venture by a reputable oil partner would endorse the region.
The Falkland Islands oil business could dominate the news
Another business that is clearly betting on a favourable outcome is Falkland Island Holdings (FKL). It has raised £8m, most of which will be spent on the Falklands where the company owns a number of sites on the outskirts of Stanley which are suitable for the development of a warehouse park for rental to oilfield services companies.
Anticipating an influx of oil men, it is also planning to invest in housing, offices, retail operations and its Land Rover dealership, and it has signed a joint venture with Southampton-based Trant Construction Limited.
So despite the sound and fury of the political debate, the oil business of the Falkland Islands is proceeding apace. In the next few weeks it could take a major leap forward. Results from Border & Southern’s Stebbing well and FOGL’s Loligo, along with news of a partner for Rockhopper, and the Falklands will be in the news for reasons that have nothing to do with the anniversary of the war.
• This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
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